Peter, Peter Pumpkin Eater

I've never been a fan of the Austrian schools, just because they're by, for, and of the .1%. There's not much good for an entire economy in that. In looking for data to confirm, or refute, the notion that the Captains of Industry are just playing financial engineering games with all that moolah, I ran across this piece by Peter Schiff. He's a right wingnut, by a wide margin. You can look him up on the Wiki, if you're interested. What caught my eye was this:

In 2009, Gross Private Investment collapsed to almost 12% of GDP, which was the lowest level in the post WW2 period and compares with a median level of 19% in the three decades prior to the Great Recession. Since 2009, Gross Investment has rebounded and is now 16% of GDP. Many growth bulls expect this level to rise over the next few years, noting that the average age of U.S. capital stock (i.e. plant/equipment) is at record highs and needs to be upgraded. Recently, this view has gained traction with improvements in forward-looking surveys, like the Purchasing Managers Index (PMI). In the near-term, we do expect a modest bounce in capital investment to make up from weather related disruptions earlier in the year, but we are more skeptical about a multi-year boom.

First, we believe much of the recovery in private Investment was supported by bonus deprecation tax benefits (initiated during the recession) that enticed many corporations to accelerate investments in 2010-13. These incentives ended on Dec 31, 2013, so businesses have less reason for new investment. For companies to increase investment without government support, sales levels need to increase, which will remain difficult as household balance sheets and incomes remain under pressure. As a note, the current level of private investment (16% of GDP) is below median levels during the thirty years prior to the Great Recession (19% GDP), but it is consistent with the thirty year period following WW2 (17% GDP).

Second, companies have recently been more inclined to acquire rather than try to grow organically. In the first half of 2014, total U.S. M&A deals were over $750B, which was up 50% from the same period in 2013 and on pace to hit annual levels not seen since 2006-2007. Also, almost 95% of recent deals have been strategic (companies, not private equity, buying other companies) which compares with just 75% in 2006-07. If companies saw organic opportunities then this cash would be invested in new plant and equipment instead of paying premiums for existing firms. With easy access to relatively cheap capital, we expect the M&A spree to continue, noting that this will actually result in job losses (vs. capital spending that drives job gains).

Finally, companies that have not found attractive M&A opportunities have been using cash to raise dividends and buy back stock. In the first quarter of 2014, U.S. share buybacks and dividends hit a record level of $241 billion. Returning excess cash to shareholders is normal when growth prospects are dismal, but the recent trend has been exacerbated by activist investors that are pressuring companies to use leverage to return cash. As a result of this, combined with M&A activity discussed above, business (non-financial) leverage is at record levels. This bodes poorly for a surge in real investment.

Closely read, he makes the refuting argument to his basic thesis: the US consumes too much and invests too little. Even though he is credited with calling the The Great Recession, he, by all accounts, missed the motivation; even in the early 00s the Captains of Industry were running from physical investment to financial game playing. Cognitive dissonance rides again.

The hidden truth: the country with the reserve currency of the global economy will always, in fact must, run trade deficits. Think about the situation from the point of view of other economies. They have to get reserve currency in order to acquire goods and services. In order to do that, they have to sell lots o widgets to the reserve currency economy, which means that economy has to buy lots o widgets. As The Great Recession demonstrated, when the global economy gets wonky, even a weakened reserve currency is still the best bet. The alternative is to return to a specie regime, which, among other things, puts the global economy in the hands of the likes of South Africa. The global economy had the chance to switch to a commodity based currency, the petrodollar, in the aftermath of the 1973 OPEC embargo. That never happened for the good and simple reason that the First World economies recognized, even if their leaders would never be so honest as to say so, giving control to natural resource rich, but otherwise backward autocrats didn't serve them. Neither in the long run or short run.

You can't have organic growth when the 1% or .1% control most of the moolah. Especially in light of the fact that you can't eat software.